Paying for college is one of the biggest financial outlays a family can make. Reviewing the new FAFSA rules, early career planning, and getting an early start at saving for college with the right financial products are a must. Here are a few things you should know about funding a college education.
The FAFSA (Free Application for Federal Student Aid) is the primary source that colleges use to calculate a student’s eligibility for financial aid. Filing a FAFSA form for the 2017-2018 academic year will begin October 1, 2016. That means that there is a lookback of two years for the 2017-2018 academic year. As a result, people will find out about their financial aid awards sooner and decisions about where they want to go to school can be made earlier. The lower the EFC (expected family contribution) to finance the cost of college, the bigger the potential need for financial aid. Parent’s assets have a lower weight than the student’s assets - 5.64% versus 20%. 529 plans owned by a parent are considered parents assets, while grandparents or other relative’s ownership is considered a student’s asset.
Your student’s major may have a huge impact on future earnings, how quickly student loans can be repaid, and how much out-of-pocket spending you will have. Planning a career in engineering or sciences, some of the highest paying high demand areas, will allow your student to pay back loans quickly and accelerate their financial security. Choosing a career in elementary education, music education, physical education, social work, drama, and journalism can be emotionally and socially rewarding, but are not high paying, high demand jobs. Go to http://www.payscale.com/college-salary-report/majors-that-pay-you-back/bachelors for additional information on the highest and lowest paying careers for college graduates.
Associates degrees at your local community college may also offer high earning rewarding careers. Associate degrees in the medical field and technology areas have starting salaries well in excess of the lowest paying careers that require a four-year degree.
A parent’s best vehicle for saving for college is to fund a state sponsored 529 plan. Many states give parents a state tax deduction for the annual contributions. A 529 plan is still considered an asset of the parent and has a lesser impact on the FAFSA calculation than a savings plan held in the name of the student. If the student decides not to go to college, the beneficiary in the 529 plan can be changed to another family member of the same generation.
Instead of grandparents funding 529 plans, they may want to set up revocable educational trusts. The trusts are controlled by the grandparent and the funds can be earmarked for the grandchild’s education, but it won’t be considered an asset of the student. Another advantage to the revocable educational trust is that if the grandchild chooses to forgo college, the funds can be used for another purpose.
A Roth IRA, owned by a parent, can be a good source of funds for college. Roth IRAs enjoy a unique tax treatment. Withdrawals are treated as a "return of contribution" first and as earnings second. This means that a person who has been contributing $5,000 per year for the past five years can withdraw $25,000 tax-free, provided the proceeds are used for qualified educational expenses. (Any withdrawals that exceed the total of one's contributions and are attributable to earnings will be taxable for those under age 59½.)
The bottom line on college planning is to learn about financial aid early on, start saving early using the most appropriate investment vehicles, have your student start exploring career choices early, and talk with grandparents about funding options appropriate for your children.
CFP®, FLMI, Annuity Product Manager
Call 877-935-2467 to speak with a Western Fraternal Life Representative.